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Friday, May 3, 2013

Linkedin reported earnings last night, and I plan to write an article after each quarter for now on as a diary tracking how an impossibly valued company adjusts to its real valuation, and how the financial industry may attempt to distort and manipulate that valuation.

Core maximum future value remains below current price
The total recruitment market was last measured 2 years ago, at $3B. Even if that grows to $4B, linkedin is suited to only the higher end job portion of that market. If it is paid $200 per job, it needs to place 15M jobs per year in order to generate $3B in sales. A couple of months ago (end of article), I estimated worldwide online job postings at below 8M with many of the postings having fees much lower than $200 including free.

So it is hard to understand how LNKD could ever reach as high as $3B in core sales, and $1B in annual profits, and so a maximum corporate future value of $10B, which is a maximum future share price of below $90. Considering the risk of failing to reach that maximum, a $45/share or below current price is appropriate.

The lack of takeover or dividend potential
The true value of a share of stock can only be measured by the payments that share is entitled to receive: Dividends and takeover bids. If a company is too large, and too highly valued, with no real cashflow stream then it cannot be taken over at a price near its current value. Similarly if its structure discourages ever paying a dividend, its stock value can only be measured based on significant deterioration in stock price that is necessary before management considers selling or issuing a dividend, and a price that buyers can rationally consider the whole company based on cashflow.

LNKD meets all of these overvaluation criteria, as it has tightly controlled dual class shares. A related issue is that it uses that concentrated control to issue extremely generous stock compensation to itself (and employees). Its irresponsible for the financial analyst and media industries to ignore that compensation in its results. That compensation has a real effect on the valuation of shares for both takeout and dividend purposes as well. The below $90/share ($86.65 = 10B / 115.4M shares) maximum future value is based on current shares outstanding of 115.4M. Just 18 months ago, that same $10B maximum total future value translated to over $100/share because the shares outstanding were 98.8M.

Linkedin estimates that it will award its insiders $195M in shares this year, and that number excludes the 512k shares it is giving out for its acquisition of Pulse. The share issues are the main reason it has never been profitable, and there is no reason for it ever to stop issuing nearly all operating profit to insiders, because it has complete insider control of the company, the support of the financial analyst community, and the support of state of Delaware. That future stream of insider share giveaways further reduces any maximum future share value estimate. There is no reason for LNKD's management to ever pay all shareholders through a dividend when it can be applauded by the analyst community for paying itself.

Linkedin forecasts
For the next quarter, Linked in is forecasting year over year sales growth of about 55%, and core (after depreciation and stock compensation) earnings ranging from a loss -$6M to 0. For the next 3 quarters, it is also forecasting year over year sales growth of 55%, and core earnings range of $-21M to $4M. A significant slowdown in growth is occurring in non-US markets.

Declining sales growth
Even if LNKD beats its own estimates considerably and achieves 60% growth, it would be a significant drop from 2012's year over year growth of 81%, and this quarter's 72% yoy growth. It would also make the most reasonable optimistic estimate for 2014 growth to be 45%, and 2015 growth nearing 30%, even if you make the mistaken assumption of an infinite addressable targetable sales market for Linked in, instead of it approaching its potential penetration cap.

With declining sales growth and no real earnings, even with the mistake of assuming an infinite potential market, valuing the company at over 14 times 2013 sales ($202/share) is not close to reasonable.

Comscore vs. Alexa metrics
Another peculiarity of Linked in results is that it reported a healthy 13% quarter over quarter increase in comscore internet metrics for use and pageviews, but Alexa's more transparent internet monitoring service shows no change in the last 6 months for Linked in's pageviews, time spent on site, and reach.

I can't explain the difference, but someone should be explaining it.

The future of employment and robotics
Relevant to linked in's value 10 years from now, and so its real value today, is how robotics might transform employment. General purpose personal robots are closer than we think, and it not only ends many types of employment, it ends the need for most types of factories. The main reason personal robots will arrive soon is that they are cost effective if they can be transformed into self-driving electric cars as one of many potential transformations, and widespread adoption of standardized components makes programming and sharing the programming of the robots cost effective and easier, much like computer and phone apps are easier and cheaper because there is a large market available to share them.